The dead hand of regulation

Anyone who has been working in this industry for more than ten minutes will probably have heard the following phrase; “Regulation is stifling/killing/destroying/hampering (delete as applicable) innovation”. I have certainly heard it more times than I care to remember at conferences and in meetings but is it true, or just a platitude?

If you are a believer in the Porter hypothesis it seems unlikely. Michael Porter suggested that appropriately designed regulation would raise corporate awareness and motivate new process and product innovation. If you take a look at the automotive industry it seems like he was onto something. There is a strong correlation between patent applications and technological developments in line with the introduction of new regulation, especially in the United States.

So why is it that the Financial Services industry has such a negative view of all things regulatory? The problem is the way regulation is applied. You’ll note that Porter’s hypothesis required the regulation to be ‘appropriately designed’. All too often in this industry, there is an overemphasis on regulating business activities when focus should be on regulating business outcomes. Regulation needs to be based on measurable outcomes to make it achievable.

The advice process is a good example of this. The FCA currently regulate the constituent parts of the process, and for each off these, define certain rules and criteria that must be met. Compare this with the regulatory requirement for vehicles and you will see standards defined for a particular end result, be it the gram per kilometre expulsion of nitrogen oxides or the required labelling definitions for tyre walls.

So if we were to start applying some measurable targets to Financial Services businesses, where would we begin? How about setting a minimum acceptable return for asset managers, within a certain percentage of a defined benchmark? Targeting a maximum percentage of claim rejections might be an acceptable measure for those selling protection products, while capping the APR for retail lending is something the government is already looking at to reduce bad debt among customers.